When it comes to running your brewery, there are two main types of accounting: cash-basis and accrual.
Knowing which one is right for your business can sometimes be a case of trial and error, especially in the early days when you have a lot of overheads, you’re trying to maintain a good cash flow, and balance the books.
Brewing is one of those industries where there are a lot of upfront costs associated with creating your product. Getting a handle on ordering and storing the right quantities of ingredients, without wastage, to ensure that you account for your expenses and income in favour of the latter, is a delicate balancing act.
Doing it right, can be all the difference between a profitable brewery having to close, and a brewery showing a loss turning it around.
So can you really afford to slip up? Chances are, if you’re reading this, you’ve already made a choice, or you’re having doubts. And that’s okay.
Sometimes your trusted accountant, who might be great at processing the numbers and keeping you compliant with reporting and tax regulations, isn’t necessarily the best strategic advisor when it comes to running your brewery in the way that’s right for you.
To make it easier to decide whether you should be using cash basis or accrual accounting, we’ve prepared this simple guide.
What is cash basis accounting?
Cash basis accounting is a method of recording income and expenses at the point in time when they’re actually received or paid, as opposed to when they’re incurred. So the moment your brewery pays an invoice from a supplier, that cost is deducted from your balance. When you invoice a customer, that income is credited to your balance.
For example, imagine you make a purchase order with a hop supplier totalling $3,000 for brewing the next quarter’s batch. With cash basis accounting, this expense is not recorded until you actually make the payment – which may not be for a few months.
For startups and very small businesses, the great thing about cash basis accounting is that it keeps things simple. It gives you a clear picture of your actual account balance, and when your business only has a small inventory, it makes sense. The thing is that brewing is an industry which requires a large, time-sensitive inventory, whether you're a two-person microbrewery or a rapidly scaling craft brewer.
Now let’s say it’s time to brew your next batch. Those hops were one of many ingredients you’ve purchased in order to start brewing. With cash basis accounting, now that those orders have arrived, it’s time to start paying the invoices. But your product isn’t ready yet, or you’ve not been paid by your customers. So you’re recording all those expenses, but you’re not able to offset them against your income.
At the same time, when all those paid invoices come rolling in on time from your customers, you’re presented with a sudden injection of cash. You might have a healthy bank balance, but did you have a good month? With cash-basis accounting, it’s hard to tell. Why? It’s difficult to analyze sales trends, month to month, because of the delay caused by recording actual payments in real-time. This can also make sitting down to negotiate your next round of financing slightly more challenging
With the accrual method, you get an instant month by month snapshot of your income, expenses, and profit – even though you may still be waiting for invoices to get paid.
What is accrual accounting?
Accrual accounting is an accounting method which enables you to record income before you’ve actually received payment for your product or service. By the same token, you can record your expenses in advance of paying for them.
Let’s go back to that purchase order for $3,000 worth of hops from your supplier. They’re still due to arrive in the next couple of months, and when they do, they’re considered an asset until they’re used. After they’re used and sold, the hops are expensed as a part of your cost of goods sold (COGS) – meaning that, with accrual accounting, you account for the expense as the asset is used.
So, say you send out crates of your latest batch to a customer with a 30-day invoice. You know they always pay, but sometimes you have to wait a little longer. With cash-basis accounting, you couldn’t account for that income until it was sitting in your account. However, accrual accounting enables you to record the transaction – even though it hasn’t happened yet.
Accrual accounting follows the matching principle, recognizing income and expenses within the same time period – which is a great advantage for your inventory-heavy brewery. Why? It’s much easier to match income with expenses, meaning you get a much clearer picture of your current financial position, this month and every month. At a glance, you can see what kind of month you’ve had – even if you’re still waiting to pay suppliers, or you have outstanding invoices from your customers.
So it’s time to brew your next batch. You’ve received your hops and other ingredients from suppliers – and you’re going to pay their invoices in due course. When your beer’s brewed and ready to dispatch, you can start fulfilling your orders. And even though it takes them longer than you’d like to pay, all your income and expenses are accounted for. What kind of month did you have? You can see in an instant.
And over the course of months, and years, you can start to see trends. Selling more beer in the summer? How can you boost those winter warmer sales? Seeing a dip in sales during Halloween? What about releasing a festive flavour?
Which type is right for your brewery?
Cash-basis accounting is all well and good for small enterprises working in industries with minimal inventories. But even if you’re a two-person brewery start-up, you’ll need a fair investment of capital, trust in getting paid on time, and confidence that nothing will go wrong with your next batch to feel assured of staying afloat or even turning a profit.
In an inventory-heavy industry like brewing, accrual accounting seems to fit the bill because it means you’ll always have a more accurate picture of each month, and your numbers don’t get skewed by delayed payments.
Here at Brew Ninja, we’re not your business advisors, but we can give you a helping hand if you’re using, or considering using, accrual accounting. That’s because, in our experience, it seems to work best for our brewers.